Lost your password? Please enter your email address. You will receive a link and will create a new password via email.
Please briefly explain why you feel this question should be reported.
Please briefly explain why you feel this answer should be reported.
Please briefly explain why you feel this user should be reported.
Explain the process of credit creation.
Banks are responsible for accepting deposits and creating credit for the borrowers. Banks keep a part of deposits as reserves(LRR) which is legally compulsory. And the rest is given out as loans by opening a account in which this amount is deposited, the interest from these loans become income for bRead more
Banks are responsible for accepting deposits and creating credit for the borrowers. Banks keep a part of deposits as reserves(LRR) which is legally compulsory. And the rest is given out as loans by opening a account in which this amount is deposited, the interest from these loans become income for banks. For example: banks receive ₹1000 as initial deposit and keep 20% as cash reserve i.e ₹800 as loans and ₹200 as LRR. Then ₹800 is credited in new account for loan, and when used for payment by borrower comes back to bank. So, similar to the previous stage, of the ₹800 deposit ₹160(20% of ₹900) is kept as reserve and ₹640 as loans. In third stage, from the ₹640, ₹512 will be given out as loans and ₹128 as reserves. This process continues and deposits keeps on increasing by 80% of last round, and reserves also increases by 80% of last round. This process comes to an end when total cash reserves equals to initial deposit, that is when cash reserves=₹1000, and banks will be able to create total deposits of ₹5000 with initial deposit of ₹1000. Thus, it helps in increased lending by banks, investment and thus income.
See lessExplain the process of credit creation.
Banks are responsible for accepting deposits and creating credit for the borrowers. Banks keep a part of deposits as reserves(LRR) which is legally compulsory. And the rest is given out as loans by opening a account in which this amount is deposited, the interest from these loans become income for bRead more
Banks are responsible for accepting deposits and creating credit for the borrowers. Banks keep a part of deposits as reserves(LRR) which is legally compulsory. And the rest is given out as loans by opening a account in which this amount is deposited, the interest from these loans become income for banks. For example: banks receive ₹1000 as initial deposit and keep 20% as cash reserve i.e ₹800 as loans and ₹200 as LRR. Then ₹800 is credited in new account for loan, and when used for payment by borrower comes back to bank. So, similar to the previous stage, of the ₹800 deposit ₹160(20% of ₹900) is kept as reserve and ₹640 as loans. In third stage, from the ₹640, ₹512 will be given out as loans and ₹128 as reserves. This process continues and deposits keeps on increasing by 80% of last round, and reserves also increases by 80% of last round. This process comes to an end when total cash reserves equals to initial deposit, that is when cash reserves=₹1000, and banks will be able to create total deposits of ₹5000 with initial deposit of ₹1000. Thus, it helps in increased lending by banks, investment and thus income.
See less